Volkswagen Emissions Scandal Explained: What Did VW Do Wrong And What Happens Next

22/09/2015 17:51 | Updated 24 September 2015

Volkswagen is currently embroiled in a worldwide emissions scandal that could fundamentally change the car industry in years to come and could potentially cripple a company that was just recently crowned as the largest car manufacturer in the world.

In less than a week €26bn has already wiped from the company's value, while Volkswagen's CEO Martin Winterkorn has said that he will now step down, despite initially claiming otherwise.

Despite the enormous costs that will be inflicted upon VW, it's believed that Winterkorn could still leave with up to $32m in pension payments.

With over 11 million cars potentially affected across the world the scandal will almost certainly affect someone you know in some way.

vw cars

Volkswagen is considered to be the largest car seller in the world.

To cut through the noise here's what has happened thus far:

So what has Volkswagen done?

The US Environmental Protection Agency claims that Volkswagen installed an illegal piece of software in its diesel cars that would allow the vehicles to appear far more environmentally friendly during testing than they would in the real world.

Called a 'defeat device' this piece of software changes the way the engine behaves, massively reducing the amount of harmful emissions being produced by the car.

How does a 'defeat device' work?

Modern diesel cars use a fluid called urea that's then pumped into the exhaust system which in turn reduces the amount of nitrogen oxide that's released into the atmosphere.

A 'defeat device' is a piece of software that can detect when the car is undergoing emissions testing at which point it will start pumping more urea into the system.

car exhaust

A sensor is placed inside the exhaust which then measures the car as it 'drives'.

The problem is that it's not sustainable. Under normal driving conditions the fluid would run out extremely quickly.

For short periods of time though such as say, in a laboratory, the system can make the car appear to be far more environmentally friendly than it actually is.

That sounds highly illegal?

You would be right, it absolutely is.

The accusation is that a car company has been mis-selling vehicles that are far more harmful to the environment and to people than they claim to be.

The Guardian reports that a legal firm in the US has already started a class action law suit in behalf of US car owners and it's strongly expected that Volkswagen's managers could face criminal charges.

How many cars are affected?

It's initially believed that around 11 million diesel cars made by Volkswagen are affected worldwide. There are however increasing concerns that the scandal won't just be limited to Volkswagen with many countries now re-examining their emissions testing procedures.

vw car

New VW cars stored in Aerial, Boston await being sent to their respective showrooms.

How will this affect Volkswagen?

Well the company has taken an almost crippling blow both financially and in terms of its reputation.

The BBC reports that the car maker has already set aside €6.5bn to cover the costs of the scandal. This includes paying for a massive 482,000 vehicle recall that has been ordered by the US government.

That's just the start though. If you use each affected car as an example and then apply the relevant fine ($37,500 a car), the upfront cost alone could reach $18bn. An enormous figure for a company that was recently valued at $75bn.

What has been Volkswagen's reaction?

vw cars

After initially refusing, CEO Martin Winterkorn has now stepped down from the company.

Unsurprisingly the company has been doing massive damage control. The company's CEO Dr. Martin Winterkorn had initially said he would not step down, instead releasing a statement saying:

"I personally am deeply sorry that we have broken the trust of our customers and the public. We will cooperate fully with the responsible agencies, with transparency and urgency, to clearly, openly, and completely establish all of the facts of this case. Volkswagen has ordered an external investigation of this matter."

"We do not and will not tolerate violations of any kind of our internal rules or of the law."

Despite this Winterkorn announced on Wednesday that he had asked the board to terminate his contract as CEO of the company. Bloomberg reports that while his exit will be as a result of the scandal the ex-CEO could still walk away with over $32m in pension payments.

So what happens next?

Volkswagen will almost certainly face massive fines and it's likely that many of its high-ranking managers will face criminal charges.

Then there's the fact that almost half a million car owners in the US will have to have their vehicles recalled while Volkswagen works out what it's going to do with cars that don't meet their initial emissions claims.

In the rest of the world, and in particularly the UK, the car industry will wait and watch as regulators decide whether or not they need to reevaluate their own testing methods.

Both the UK and the EU have far stricter testing methods so it's less likely that any car manufacturer would have been able to use this same method to hide their emissions figures.

In a statement, the Transport Secretary Patrick McLoughlin said:

"We are closely monitoring the situation and have been pushing for action at a European level for more accurate tests that reflect driving on the road."

"It's vital that the public has confidence in vehicle emissions tests and I am calling for the European Commission to investigate this issue as a matter of urgency."

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